What are open-ended mutual fund & close-ended mutual fund?

Priyanka Sharma

13 Jun 2017

New Page 1

Financial world and its terminologies can leave the most intelligent people baffled with its nitty gritties. To a layman it all appears the same until he/she dwelves deeper to create a portfolio of their own. We simplify the financial terminology to help you understand this not so complex world of finance easily.

What are open-ended funds?

Open-Ended Funds are simply put a category of the mutual fund where there is no restriction on the number of shares issued. For example, when Mr X purchases shares in a mutual fund, the number of shares overall increases. But when Mr X sells his shares, those shares are taken out of circulation and if required for large dealings the fund manager may have to sell some of the investments to pay off Mr X’s money.

Funds and their managers are prone to seeing a continuous entry and exit of investors as the funds sell their shares on a regular basis. Open-ended funds allow the opportunity of purchasing and selling shares even after the initial offering (NFO) period. This is applicable only in the cases of new funds as the shares are bought and sold at the net asset value (NAV) declared by the fund.

Mutual funds are different from stocks in all respects and hence unlike your stocks you will not be able to monitor them or trade them in the open market. While the transactions happen on a daily basis on the fund with the selling and buying of new shares, in proportion to the same the total value of the fund or net asset value (NAV) is repriced accordingly.

What are closed-ended funds?

While the open-ended funds and closed-ended funds look similar, they're very different. To be precise a closed-ended fund is more like an exchange traded fund than a mutual fund. Like ETFs they are launched in the market through an IPO in order to raise money and then trade in the open market just like a stock or an ETF. The shares issues by this fund are limited and their value is estimated on the basis of the NAV. Though the value of these shares is based on the NAV, the actual price of the fund is determined by the supply and demand, and therefore the price of trading always differ according to the real market value.

Close-ended funds give a high dividend and therefore attract more investors. However, investors need to understand that though the borrowed money produce big returns on investment, using borrowed money for investment can get the fund under intense pressure in the long run.

Conclusion

While open-ended fund products are a safe choice for investment than closed-ended funds, the latter offers lucrative deal in terms offering higher dividend payments and capital appreciation.

We advise investors to be careful and come to any decision post a thorough weighing of all the pros and cons.

Have Referral Code?

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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What are open-ended mutual fund & close-ended mutual fund?

Priyanka Sharma

13 Jun 2017

New Page 1

Financial world and its terminologies can leave the most intelligent people baffled with its nitty gritties. To a layman it all appears the same until he/she dwelves deeper to create a portfolio of their own. We simplify the financial terminology to help you understand this not so complex world of finance easily.

What are open-ended funds?

Open-Ended Funds are simply put a category of the mutual fund where there is no restriction on the number of shares issued. For example, when Mr X purchases shares in a mutual fund, the number of shares overall increases. But when Mr X sells his shares, those shares are taken out of circulation and if required for large dealings the fund manager may have to sell some of the investments to pay off Mr X’s money.

Funds and their managers are prone to seeing a continuous entry and exit of investors as the funds sell their shares on a regular basis. Open-ended funds allow the opportunity of purchasing and selling shares even after the initial offering (NFO) period. This is applicable only in the cases of new funds as the shares are bought and sold at the net asset value (NAV) declared by the fund.

Mutual funds are different from stocks in all respects and hence unlike your stocks you will not be able to monitor them or trade them in the open market. While the transactions happen on a daily basis on the fund with the selling and buying of new shares, in proportion to the same the total value of the fund or net asset value (NAV) is repriced accordingly.

What are closed-ended funds?

While the open-ended funds and closed-ended funds look similar, they're very different. To be precise a closed-ended fund is more like an exchange traded fund than a mutual fund. Like ETFs they are launched in the market through an IPO in order to raise money and then trade in the open market just like a stock or an ETF. The shares issues by this fund are limited and their value is estimated on the basis of the NAV. Though the value of these shares is based on the NAV, the actual price of the fund is determined by the supply and demand, and therefore the price of trading always differ according to the real market value.

Close-ended funds give a high dividend and therefore attract more investors. However, investors need to understand that though the borrowed money produce big returns on investment, using borrowed money for investment can get the fund under intense pressure in the long run.

Conclusion

While open-ended fund products are a safe choice for investment than closed-ended funds, the latter offers lucrative deal in terms offering higher dividend payments and capital appreciation.

We advise investors to be careful and come to any decision post a thorough weighing of all the pros and cons.

Have Referral Code?